One of the most essential steps before starting a new business is to choose an entity type, and most entrepreneurs prefer either a limited liability company (LLC) or a corporation. Both of these forms of business entities may offer a number of significant benefits to organizations and also have specific disadvantages. Particular similarities and differences between them, including structure, liability for business debts and claims, effects of tax laws on the company and its owners, management issues, and transfers of ownership, allow future business owners to make the right decision.
To begin with, an LLC and a corporation do not have entirely the same structures. The most standard design of corporations includes owners or shareholders, employees, officers, and board of directors (U.S. Small Business Administration). As for limited liability companies, they typically involve managers and members (U.S. Small Business Administration). The former group is responsible for daily business operations and is similar to corporate officers in a corporation. The latter is the business owners who are like a corporation’s shareholders.
As for the liability for business debts and claims, it is almost the same for both types. An LLC and a corporation protect the personal assets of its owners, and it is probably the most significant advantage of these forms of business entities (Schmidt). The liability of their owners is limited, and they are not personally responsible and charged for either their corporation’s or LLC’s business claims and debts (U.S. Small Business Administration). It is only possible for creditors to collect on their debts through the corporation’s assets, and the owners of the limited liability company only pay a fixed sum that usually equals the amount of money they have invested in their business.
Corporations have double taxation in relation to their income, meaning that it is taxed twice – at the corporate entity level and when it is distributed to the shareholders. As for LLCs, they generally have pass-through taxation, so the profits get to the owners and are taxed to them. What is more, LLCs are able to choose the way they prefer to be taxed.
Both manager-managed and member-managed LLCs may face specific issues. For example, the first type may have problems in case owners do not like or agree with the managers’ daily decisions. The second type of LLC involves several owners with equal voting rights, so the issues may appear if some members have disagreements (U.S. Small Business Administration). The same conflict of interest may occur between shareholders or members of the board of directors in a corporation. As for transferring ownership, there are two ways of doing that with an LLC, namely, transferring partial interest or selling the company. It is essential to let the state agency know about this, review the operating agreement, follow the buy-sell procedures, update documents, and notify the necessary parties. When it comes to transferring ownership of a corporation, it is easier than with an LLC since the shareholders only need to sell their stock to other people.
When exploring some particular situations, it is possible to find some mistakes that should have been avoided to achieve the greater performance of a company and also some good decisions. For instance, if a person wants to pay fewer taxes and have a company that is easy to establish, it is the right choice to choose an LLC instead of a corporation. However, suppose one realizes that they are not able to invest much money and require additional funding. In that case, an LLC is not a very good option since it cannot attract outside investment if the bank refused a loan to the company. Further, a family restaurant business that the owners want to stay in the family for future generations should become an LLC as it will be possible to have family control over the operations. At the same time, an antique car parts business to be owned by three friends is better to be a corporation so that they can have equal rights.
Schmidt, Jonathan D. “Are You at Risk? Shareholder Liability for Corporate Debts.” 303 Legal. Web.
U.S. Small Business Administration. “Choose a Business Structure.” SBA.